Corporate Tax Planning in Malaysia
Tax planning is the process of looking at the available tax options in order to determine how the Company can conduct the business transactions so that taxes are eliminated or reduced.
Below are some pointers which companies may note for tax considerations, depending on its tax position.
General Tax Planning
- Being a SME (Generally, SME refers to resident companies that has a paid-up capital in respect of ordinary shares of RM2.5mil or less at the beginning of the basis period for a YA), the first RM500,000 Chargeable Income will be tax at 17% in YA 2019 (18% in YA 2018) and the Chargeable Income above RM500,000 will be tax at 24%. Therefore, by determining the first year end with a shorter or longer period, you may have a lower / higher tax payable amount.
If the first tax basis period is 1 Jan 2018 to 31 December 2018, you are paying 18% for chargeable income below RM 500,000. If the first tax basis period is changed to 1 Jan 2018 to 31 Jan 2019, you are paying only 17% for the chargeable income below RM 500,000. The amount of tax saving is RM5,000.
- By stating that one of Company’s objects is investment holding (and supported by facts / documentation), it could have a bearing in contending that certain disposals of land or property by Company are disposals of capital assets rather than disposals of stock-in-trade, which makes a difference when it comes to the assessment of the tax payable.
- Estimate your tax payable amount accurately to avoid the penalty on underestimation of tax payable under the Income Tax Act. The Company can submit the CP 204A to revise the estimate of tax payable in the sixth or/and ninth month of the basis period.
- Apply for specific industry tax incentive such as MSC Status.
- Record keeping. Supporting documentation for transactions are important to substantiate a tax deduction claimed. Examples include invoices, receipts, contract, agreement etc. If taxpayer is unable to provide sufficient documentation to support the expenses claimed as tax deductible, the IRB is likely to disallow the deduction, which will result in additional tax payable and huge penalties imposed. As such, it is important to keep all the relevant supporting documents and ensure they are readily available in the event of tax audit.
- Start early to optimise tax deductions. Generally, pre-commencement expenses are not allowable as a deduction against gross income as they are not wholly and exclusively incurred in the production of income.
- To consider the implication of withholding tax if there are payments to be made to non-resident.
For companies in a loss making/ non-tax paying position
- Business losses can be set off against income from all sources in the current year. Any unutilised losses can be carried forward indefinitely to be utilised against income from any business source. (effective from YA 2019, the time limit is 7 YAs). If the company is dormant, the carry forward of losses is only allowed if the shareholder continuity test is met.
- Unabsorbed capital allowances can be carried forward indefinitely to be utilised against income from the same business source. If the company is dormant, the carry forward of capital allowances is only allowed if the shareholder continuity test is met.
- Group relief is a scheme which enables Malaysian related companies to deduct 70% of current year adjusted business losses of the surrendering company from the defined aggregate income of another company (subject to conditions).
For companies in a tax-paying position
- Capital allowances may be utilised to reduce the chargeable income.
- The declaration of director fees / contractor fee may be considered if the arrangement offers potential tax savings. This may be performed through tax planning which involves the comparison of effective tax rates.
- Companies may also consider debt financing over equity financing as interest expenses are tax deductible provided the monies borrowed are used for business purpose.
- Review may be conducted on the outstanding debts to write off long-overdue debts which are irrecoverable.
- Review may be conducted on the obsolete stock to write off.
- Annual bonus payments to the employees (the actual bonus amounts must be ascertained and made known to the employees thereby ‘incurring’ the bonus expense, notwithstanding that the payment is made after year-end).
- Companies may re-assess the accounts to identify any omitted accrual expenses.
- Deferring taxable income to the next year of assessment. Delaying can sometimes result in it being charged at a lower corporate tax rate, in cases where there is reduction of corporate tax rate. It will result in some tax savings and cash flow.
- Bringing forward tax deductible expenses would also reduce the tax payable.
- Motor vehicle – claiming of capital allowance for company vehicles, and reimbursement of motor vehicle expenses used for business purposes (the motor vehicle benefits may need to be disclosed in EA form). Taxpayer is advised to maintain record for business and private use.
- Tax exempt benefit
All business decisions today have tax implications and it is important for a company to manage its income tax requirements efficiently. At 3E Accounting PLT, we work closely with you to identify tax strategies that work best within your organisation and manage your tax compliance.